We expect faster credit expansion in 2018 on the back of strong GDP growth across the region and low or only slowly rising interest rates. Credit growth does not appear excessive given the still tentative recovery in corporate demand, although early signs of overheating in household lending in the Czech Republic and Slovakia have prompted regulators to act.

We expect further improvement to asset quality across the region driven by supportive operating environments. Stronger economies allow for easier resolution of legacy bad debts and limit the formation of new non-performing loans. Bulgaria and Slovenia lag behind other CEE markets in terms of cleaning up loan books, but solid capital ratios in Bulgaria and high reserve coverage in Slovenia limit the associated risk.

We expect pressures on profitability will be alleviated by loan growth, with impairment charges contained, and funding and liquidity comfortable. Margins have largely stabilised, except in Bulgaria, where further contraction is likely. Margins would benefit from gradually rising interest rates. Rate rises began in the Czech Republic in 2H17 and are likely in 2018 in Poland and Romania.

We expect banks' improved internal capital generation to mitigate the drag on capital ratios from lending growth, increased regulatory requirements and IFRS 9 implementation, and most banks should be able to hold capital buffers comfortably above the minimum requirements.

CEE banking systems are mainly self-funded by domestic customer deposits. Bank balance sheets are liquid and we expect loans-to-deposits ratios to stay below or close to 100%. (The report "Fitch 2018 Outlook: CEE Banks" is available at www.fitchratings.com)